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Airline service: You get what you pay for

Propelled by a couple of unfortunate incidents, just about everyone in Washington and many around the nation are blaming airlines for the current state of air travel. That is backwards: Today’s airline industry has been carefully shaped by both government policy and passengers’ clear preference for low fares.

If this sounds bizarre or stupid, read on.

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When Amelia Earhart and Charles Lindbergh were establishing airlines to carry mail and passengers, the federal government enacted comprehensive economic and operational regulations as an effort to assure public safety and to create a ubiquitous system that would serve the entire country.

Back then, flying was inherently dangerous. Moreover, a money-losing carrier might cut spending on maintenance or training, further jeopardizing safety. Over the years, safety and operational oversight fell to the Federal Aviation Administration (FAA), while the Civil Aeronautics Board (CAB) managed competition by controlling the number of carriers authorized to fly.

They mandated which routes airlines could serve and set fares by using a cost-plus formula that sought to assure adequate yet non-excessive profit. The system worked, but the downside was that flying was expensive and largely for the affluent.

By the mid-1970s, people began to question the logic of comprehensive regulation for airlines, telecoms, trucking and other businesses. Alfred Kahn, a Cornell University economist, argued that opening the industry to competition would lower prices, enabling more people fly.

Cheaper tickets were the primary motivation for the 1978 Airline Deregulation Act, a bill spearheaded by former Senator Ted Kennedy (D-Mass.) and implemented by Kahn, who became CAB Chairman. The 1978 law has delivered what was promised. Adjusted for inflation, average airfares are almost 40 percent lower than in 1979, including fees for checked bags and the like.

The transition to market competition has been difficult for legacy airlines, all of which have gone bankrupt at least once, and many of which have vanished. Survivors have been allowed to combine into much larger companies, able to use scale and market presence to compete more effectively with newer carriers with lower-cost structures. Legacy airlines clearly understood that the consumer votes with his or her wallet, and they have acted to provide cheap fares.

Consumer demand, not airline conspiracy, has produced the current economy-class layout. Back in 2000, American Airlines reconfigured all 700 of its jets to provide “More Room throughout Coach.” In order to make the initiative revenue-neutral, American sought to charge roughly 2-percent more per ticket. The "More Room" initiative failed; people loved the space, but would not pay a few bucks for it.

Since then, airlines have split the coach cabin and now charge a premium to the small group that prefers more space. This and other “unbundling” of airfares has increased revenues, while giving people choices that airline market research continually tells us customers want.

As in restaurants, where, if you do not want dessert you do not pay for it, people do not want to pay for space that is, in their view, overpriced. But let’s be clear: Airplane cabins are finite “real estate,” and if Congress were to mandate more legroom, seats per plane would decrease and prices would increase.

Overbooking has become a particularly hot topic because of a few very ugly exceptions to the way in which airlines manage the problem of having more passengers than seats. However, overbooking is just another practice that arose in response to customer preference.

For decades, lots of passengers were “no shows,” which resulted in many seats going unused. As recently as 30 years ago, U.S. airlines wasted 37 percent of capacity, while denying seats to passengers who wished to be on a particular flight. By overbooking, airlines reduced waste, accommodated many more passengers on the flights of their choice and kept fares low.

Almost always, overbooking properly matches passengers to seats. When there are more passengers than seats, the industry normally auctions off the right to give up a seat in exchange for money and finds many takers. At a Delta gate last week, a woman who took an $800 voucher looked like she won the lottery. There are even folks who actively book flights likely to be overbooked in order to get the vouchers.

Politicians and cranky media tell us that “bumping” (involuntary denied boarding) happens all the time, but last year the Department of Transportation (DOT) reported just over 44,000 bumpings out of nearly 660 million passengers, or 0.62 per 10,000 passengers. To understand how small a percentage that is, think of it this way: If you flew one flight every day, it would be 44 years before you would get bumped.

Airlines cannot ignore the Washington sentiment, which has been made clear in hearings in House and Senate committees last week. Sympathetic members like Rep. Bill Shuster (R-Pa.) warned carriers to improve or face some form of re-regulation.

Even former American Airlines CEO Bob Crandall, one of the most successful airline executives after deregulation, recently said, “Airlines have become very much like utilities essential to all, akin to electricity and telecommunications providers, and an appropriate mix of regulation and free-market principles ought to be used to limit potential abuses.”

Airlines have given flyers what they want, but it’s clear that there is plenty of room for improvement — as is true in many businesses. Flying has become mass transportation, and we need to figure out how to treat each of the hundreds of millions of passengers with the same dignity and respect.

That is a tall order, but carriers need to get on it. At the same time, airlines need to get better at reminding the nation of all the good things they enable — hugs, vacations, market expansion, Valentine’s Day roses, and lots more — to bring balance to a narrative distorted by ugly and unacceptable exceptions.

Rob Britton is an adjunct professor of marketing at Georgetown University’s McDonough School of Business. He worked for American Airlines for 22 years, and now heads AirLearn, an aviation consultancy.

The views expressed by contributors are their own and not the views of The Hill.